Author: duttycat

In the words of Rakim, it’s been a long time. I shouldn’t have left you. But in the words of Elton John, the bitch is back. The hiatus has largely revolved around a long gold mining season out in the hills above Airdrie. We plundered a full ounce of gold for our work, which is more than enough to pay the mortgage on my bijou flat over Wong’s chip shop in Airdrie High Street. Less a pied a terre, more a pomme de terre.

When I got back to the working man’s club I had the chance to catch up with the local shipping community of owners, operators, brokers and other arch criminals. My old pal One-Armed Archie had some interesting news for me. A buddy of ours, Paul Daniels, had recently been in town, raising money for his newest venture, which on not that close inspection looked identical to his old venture, which basically shafted and defaulted on a vast array of people. We thought our pal had been keeping a low profile after failing to offer the reacharound to ship owners who had chartered their vessels to him on contractual terms that they assumed would be respected. However, Paul respected the contracts in the same way Kim Jong Un respects freedom of speech. By the way, his real name is not actually Paul Daniels, but was given that name for his ability to make things like investors’ money disappear.

I shall now make the investors’ money disappear.

Archie told me that Paul was apparently back in the game and was in the process of trying to list his operating company on the Airdrie stock exchange at some point in 2018. To put it politely, I wouldn’t trust Paul as far as I could throw him, and at my age that isn’t very far at all. But I do respect him. You see old Paul had worked something out about shipping folk and once shared it with me over a game of darts we had during my eldest daughter’s wedding reception in the function room over Lidl in Bargeddie. He told me that the shipping press literally has no memory. He said that they faithfully report anything you say, and usually favourably too because they think that running a shipping company is like running the CIA. So whatever you say it is religiously taken at face value, even when you are totally contradicting yourself.

You’re typical shipping executive.

An example he gave me was a recent shipping conference that had a panel made up entirely of CEOs and CFOs of dry bulk companies that had at some stage gone into Chapter XI, done stock splits, rearranged defaulting loans and/or burned 95+% value for the initial investors. The packed room waited to hear this gaggle of geese give their outlook on the dry bulk market! One genius even began to extol the uptick in the Chinese domestic property market. And with all of this experience of failure available on the panel not one person in the audience dared ask the panel for an estimate of (a) how much combined investor money their companies had lost and (b) what was the combined net worth of the panel members as highly paid individuals. Who needs enemies huh?

Investors (right) pouring cash into shipping company (left) before it settles in the pockets of the CEOs (not in picture).

But my buddy is definitely not St Paul. Far from it. He ruthlessly ignores his own statements, backtracks and just says things with enough force that somehow they are not questioned. After finishing up my rum and Irn Bru with Archie I headed for the local library and got onto the micro fiche to search the shipping press archives for articles about Paul, his company and its many woes. Below I have extracted a chronology of what I found, confirming for anybody prepared to add two and two that indeed you can say just about anything if you fly business class, attend nice dinners and speak to the press once in a while. Enjoy! (I haven’t used Paul’s real name as I wouldn’t want to upset anybody now would I? The quotes have been edited by me, but the sense and facts remain untouched I assure you).

November 2015:

Paul Daniels laid bare the troubles facing the dry cargo market today, noting escalating counter party risk issues, which are becoming increasingly apparent given the distress in the market where spot rates in all sub-sectors are below operating costs. Daniels said ” What we are seeing is the increased counter party risk. You need to assess this when it comes to which counter parties you want to deal with”. He stated that asset values are not a specific risk to Nottalott Shipping: “What is important is to be able to trade the market and secure cargoes when we want them. And to a certain extent you can say the value of Nottalott Shipping increases in a bad market.”

I REALLY WANT YOU TO READ THE BIT IN BOLD AGAIN AND TRY TO REMEMBER IT. LATER YOU MIGHT THINK THAT THIS ISN’T ACTUALLY VERY TRUE AT ALL.

February 2016:

Nottalot Ship Holding is writing to ship owners in search of rate reductions as it seeks to secure its future. The loss-making business is burning $4-5m per month in cash. Nottalot Ship Holding has long-term contracts for 23 vessels and has owning interests in four more. It is trying to secure a future away from Nottalot Shipping. Commenting on the proposals, CEO Paul Daniels said ” It is shocking how weak the market has become”.

BUT PAUL! LAST NOVEMBER YOU SAID THAT NOTTALOT SHIPPING’S VALUE GOES UP IN A WEAK MARKET, RIGHT? SO SURELY YOU’RE QUIDS IN? AND DON’T FORGET YOUR WARNING ON COUNTER PARTY RISK, WHICH NOW APPEARS TO HAVE BEEN A WARNING TO YOUR COUNTER PARTIES THAT YOU WERE PLANNING ON WEASELLING OUT.

Disgruntled ship owners were willing to use all legal means to block the sale of Nottalot Shipping, even if it bankrupts McGee Ship Holding, which is the new name for Nottalot Ship Holding.

NAUGHTY NAUGHTY PAUL! IT TURNS OUT THAT YOU APPEAR TO HAVE SHELTERED ONE BUSINESS BY USING ANOTHER. SO ONLY ONE OF YOUR COMPANIES COULD POTENTIALLY GO UP IN VALUE IF THE MARKET CRASHED, WHILE THE OTHER WAS BASICALLY GOING TO GO BUST. A CLASSIC TEXAS HEDGE.

March 2016:

McGee Ship Holding could go bust in days if it cannot agree a deal with owners. The company revealed this week that it has stopped nearly all charter and other payments.

HMMMMMM, WHAT NEXT I WONDER?

McGee Ship Holding files for bankruptcy.

ALL TOGETHER NOW . . . . . NEVER!!

August 2016:

Paul Daniels, CEO of Nottalot Shipping stated: “The continued weak dry bulk market made it particularly challenging to find good opportunities in the spot market”.

NOW IS THE MOMENT TO RECALL PAUL’S QUOTE FROM NOVEMBER 2015, BECAUSE UNLESS I MISUNDERSTOOD HIM, NOTTALOT SHIPPING SHOULD BE DOING REALLY VERY WELL INDEED IN THIS MARKET. BUT IT IS ACTUALLY DOING REALLY BADLY. IN FACT ONE MIGHT SAY THAT PAUL’S POWERPOINT PRESENTATION OF THE BUSINESS MODEL MIGHT NOT REPRESENT THE REAL WORLD. BUT TO BE FAIR, HE DID SAY THAT IT WORKS WELL IF YOU ARE ABLE TO SECURE CARGOES WHEN YOU WANT THEM. TURNS OUT THAT HE CAN’T.

Nottalot Shipping reported a net loss of $11.4m in the previous quarter. CEO Paul Daniels said “We have performed well in trying to trade the market and extract a margin, apart from the last six months. We think we are now back on track”.

SO YOUR DREAM WEAK MARKET COMES ALONG PAUL, BUT YOU LOST A HATFULL OF CASH WHILE PERFORMING WELL? IMAGINE IF YOU HAD PERFORMED BADLY! IT’S STARTING TO LOOK LIKE A LOT OF CONFUSION OVER THE BUSINESS MODEL IN THE REAL WORLD COMPARED TO IN YOUR PRESENTATIONS AND PRESS STATEMENTS.

October 2016:

Nottalot Shipping CEO Paul Daniels stated: “It is not unlikely that next year will be better than this year”.

DON’T ASK ME, I DON’T KNOW EITHER.

November 2016:

Nottalot Shipping’s loss for the most recent quarter reached $7.4m, an improvement on the $11.4m of the previous. “I am pleased to see positive development in our margins” said CEO Paul Daniels. “We are moving in the right direction“.

ONE MIGHT BE BOLD ENOUGH TO POINT OUT THAT IF THE DIRECTION YOU ARE SEEKING AS A BUSINESS IS BANKRUPTCY, THEN YES PAUL, YOU ARE DEFINITELY MOVING IN THE RIGHT DIRECTION.

January 2017:

Giving his outlook for the coming year, Nottalot Shipping CEO, Paul Daniels said “We may see more volatility that will enable a company with the same, or similar business model to Nottalot Shipping to trade and try to squeeze a margin even at unsustainably low market levels for asset-heavy companies”.

WHOA WHOA WHOA! HOLD THE 42 BUS TO GLENMAVIS! PAUL IS DEAD RIGHT ISN’T HE? HE’S LOST MONEY AND BANKRUPTED BUSINESSES IN THE VERY MARKET HE HAS ALWAYS SAID WAS SUITED TO HIS BUSINESS MODEL. OTHERS MAY HAVE TAKEN SOME TIME FOR INTROSPECTION AND REVIEW, BUT NOT OUR PAUL. HE’S NOW RECOMMENDING IT TO OTHERS! AND NOBODY APPEARS TO BE POINTING OUT THE INCREDIBLE IRONY OF IT ALL. CLASSIC DOESN’T DO IT JUSTICE.

February 2017:

Nottalot Shipping posted a pre-tax loss for the first nine months of 2016 of $17.8m. CEO Paul Daniels said “I am pleased to see that the positive development in our margins and the operated fleet continue, and that the dry bulk market has shown some signs of life again during the fourth quarter”.

OH PAUL! SO NOW YOU ARE PLEASED THAT YOU ARE LOSING LESS MONEY THAN BEFORE, A PYRRHIC SORT OF VICTORY I MUST SAY. BUT CRUCIALLY AM I DETECTING THAT YOU THINK THE OLD ‘WE MAKE MORE IN A LOW MARKET’ MODEL IS NO LONGER APPLICABLE?

March 2017:

Nottalot Shipping has closed the book on an $18m private placement.

WAY TO GO PAUL! NO REALISTIC BUSINESS MODEL, A TRACK RECORD FOR BANKRUPTCY, DEFAULT AND CHICANERY, SUSTAINED LOSSES DESPITE THE MARKET DOING WHAT YOU SAY IS REQUIRED FOR PROFIT, AND DESPITE THIS, YOU GET THE DOH-REH-MI! BRAVO SIR!

June 2017:

Paul Daniels, CEO of Nottalot Shipping said “It’s not like Old Prospector Shipping, where the whole bet is on value appreciation and a hot dry cargo market. When it comes to this company, it’s about our ability to squeeze a margin out of many small decisions by many people.”

NOW WHERE IN THE HELL HAVE I HEARD THAT LAST QUOTE BEFORE? LET’S REPHRASE PAUL’S FAVOURITE ‘SQUEEZE A MARGIN’ QUOTE. “WHEN IT COMES TO THIS COMPANY, IT’S ABOUT OUR ABILITY TO SQUEEZE MORE CASH OUT OF GULLIBLE INVESTORS AS WE CONTINUE ON OUR QUEST TO CONFUSE THEM WHILE SELLING TEN DOLLAR BILLS FOR FIVE BUCKS A POP”. AND THERE ENDETH A MASTERCLASS IN SHIPPING. IF YOU WANT TO SPEAK TO PAUL ABOUT IT, YOU’LL GET HIM AT HIS SKI LODGE IN ZERMATT, OR MAYBE HIS VILLA IN MARBELLA, OR HIS FLAT IN KNIGHTSBRIGE, OR . . . .

It is easy to assume that even the most uninterested hard head among us has at some point wondered ‘what does this life all mean?’. The answer is either a mind-alteringly complex version of ‘Id’ or pretty simple – nobody knows. That doesn’t stop any of us having a guess though. From the Pope to Richard Dawkins, from ISIS to the Dalai Lama, everybody is welcome to a guess. So far, nobody has actually been proved wrong. Before you click somewhere else, I promise from here on to stick to the subject of shipping, however utterly mundane it is (as I wrote that last line I really wished that I hadn’t started with the meaning of life stuff now, but anyway . . . ).

One question that I assume we would all love to know the answer to is how big is the universe? How big is any universe? How big is the Yates Wine Lodge in Watford town centre? All laudable and unanswerable questions. I am going to focus on dry bulk shipping here though, but the point does actually remain relevant for most sectors I think. How big is the dry bulk universe? Well Clarksons says that seaborne trade in 2016 was 4.86bn tonnes. So that’s that. Except, SSY says it was 4.34bn tonnes. OK, so there is more than one opinion on this. Only that the error between the two (assuming either is right of course) is over 500m tonnes. I’ll say that again. The two most respected research departments in shipping have an error of more than half a billion tonnes on how much was shipped in dry bulk carriers last year.

So it would be prudent to check with another research company then. Let’s try somebody relatively new to the party in Affinity. They had a figure of 4.45bn tonnes, so close to SSY’s number. But that was for 2012! The 2016 number is 5.06bn tonnes (based on imports by country). Just to reiterate, it is July 2017 as I write this. So what we are looking at here is history. It has happened. And yet the vast brotherhood of shipping is making plans on what is going to happen next, forgetting the fact that the error in what they are looking at is so vast that it is the equivalent of the total imports of Japan and India combined (if you use Affinity’s figures for their imports). Again, it is worth pausing to understand that the headline number of demand for the dry bulk sector is currently being argued by a factor of 700m tonnes per year for the last calendar year. I am not referring to forecasts here. Like the meaning of life, everyone is allowed a theory. But that is all it is. It is not science. It is barely rooted in any form of fact. Somebody may very well be right, but let’s face it, even if they are it doesn’t really matter very much.

I’m assuming that we all think the same thing about this, right?

Now here is a shipping fact. Global steel production is highly correlated to the BDI. How do we know this? I know it because I read an article on a quasi-e-commerce ship broking website, which is a source of some of the most bizarrely out of date ‘pub chat’ masquerading as research in the field. It said ‘ . . . growth in global steel production is very positive for the dry bulk industry since it boosts the imports of raw materials. Therefore a high correlation exists between the BDI and the global production index’. Hell yeah! Unfortunately the author says that this is proved by a graph showing the BDI vs global steel production for the past four years. 2013 you cannot comment on, 2014 shows steel production up, BDI down, 2015 shows both down, 2016 shows steel production up, BDI down. So let’s pretend that we are not talking about dry bulk shipping for a moment. If I said to you that in the last three years on two occasions one figure had gone up and the other down, reasonably you’d say that proves nothing, but it would make me want to know whether these two sets of data have an inverse relationship.

So on our way to prove two things are highly correlated the evidence produced says that they may be inversely correlated, but more realistically, there is no proof either way. This is sacrilege on the conference circuit, blasphemy in the board room, but factually it is pretty much damn near balls dead on accurate. We’ve looked at total demand and found it to be incredibly inaccurate. We’ve looked at one standard assumption and found it to be somewhat dubious. And on we go. GDP is important, industrial production too. Nobody knows what they are within huge tolerances, and having a graph where two wildly different things are placed in different axis and look somewhat similar is not really proof of anything at all, other than the author has a basic grasp of Excel. A Tradewinds headline recent quoted Martin Stopford boldly stating that 60% of shipping demand comes from Asia. A quick check says that of the global population, exactly 60% resides in Asia. The sensible conclusion is that both of these numbers are totally inaccurate, so who cares?

So let’s take our own guess at a seaborne dry bulk trade number for 2016. If we were to say Affinity’s number is too high, SSY’s too low, it doesn’t really matter anyway as we have 700m tonnes to play with, so why not go for half way between the two? Our number is 4.7bn tonnes. I have worked in the dry bulk market for nearly 20 years, so I know that when companies say that they ship 10m tonnes per year they think that is a significant amount of cargo. It’s a number that gives them swag at the Baltic Chairman’s Drinks. Brokers want to make them appear popular and interesting. To be fair, if you piled up 10m tonnes of coal in one place it’s a lot. Then again, it is 0.2% of our estimated global seaborne trade.

It’s dull, but it’s also interesting, but then again, dull.

In context, the biggest of the big charterers says it ships 100m tonnes, 2.1% of global trade (which is guessed anyway). That company trades and ships huge volumes of third party cargoes. Its own demand (it is a power company) is a lot less. What does a typical charterer look like then? A typical charterer ships something like 500-750,000 tonnes per year, with the giants being far rarer than the minnows. If we assign 625,000 tonnes per year to the average charterer then you come to 7,250 charterers in a typical year. It turns out that dry bulk shipping is far larger, lonelier, more chaotic and certainly more difficult to calculate than you read in the magazines.

Here are some examples for you: a fairly new commodity/shipping company based in Asia ships around 10m tonnes per year, including 60% own cargoes. A chartering manager told me that she did not believe that they would not get to see the four supramax cargoes per year I mentioned to her, which are pine nut meal from Vietnam to Germany for a tiny family company based in Hamburg. Many years ago the head of chartering at a publicly listed New York-based shipping company (you can work it out right?) said to me that there was nothing that he didn’t know about the physical market. This was prior to Chapter XI ‘Mark I’of course. I met with the largest aluminium producer in the Middle East who said that they were rapidly expanding their team to cope with 18m tonnes per year of extra shipments. A friend in London told me that there was ‘nothing going on in West Africa’ and there couldn’t be or he would know about it. He operated a small fleet of Supramaxes on a worldwide basis. The list goes on and on.

I recently read a research article on Linkedin by an analyst at a well respected operating company. Based on ‘Likes’ and ‘Comments’ the article seemed to receive nodding approval from readers. I would plead with them to read it again. To paraphrase (really badly, and while I apologise for that bit, the author should apologise for his role in this), year on year volumes of bauxite for one single month were unchanged. Tonne miles, for the month were up though. He mentioned, among other pointless ‘facts’ that Brazilian exports to China were up to 319,000 for the month. If you annualised this noteworthy total it makes up 0.8% of seaborne trade (maybe more, maybe less, we don’t know to within 700m tonnes or so do we?). ‘These changes to a more ton mile intensive trade are VERY POSITIVE for the Panamax and Cape segments’ (my emphasis). Excuse me while I decide if I am going to laugh or cry. I’ll cry actually.

A pansy having a grizzle.

As an ex-girlfriend once said to me: once trust is gone it never comes back. Can we trust any of the known knowns in shipping? I’m genuinely not sure that we can. Do freight rates and vessel values correlate? Yes, of course. So the price of a five year old Supramax rose by 42% from January 2016 to June 2017. At the same time, the Baltic 10 t/cs index rose 98%.

If you want to see the graph below a bit better (pikey WordPress seems to hate my graphs) then click on the thing that says ‘graph‘ below. What it shows is that despite the assumption that the price of a ship is a function of the earnings, this P/E ratio oscillates wildly. (What you are looking at here is the price of a ship in $m divided by the spot index multiplied by 1,800 to represent five years of earnings). Now one can argue this and that about the methodology, but what you cannot say is that the value is a function of the earnings, otherwise the ratio would be close to the average of the period all of the time. It crosses the average about seven times over this period.

While the true meaning of life remains elusive to us, at least we can say one thing for sure, we may or may not actually be alive. In the case of shipping, a calculator might tell you that so many assumptions do not, cannot and never will hold any credibility. Your eyes will tell you that while nothing that is written here proves that there is no correlation, it certainly makes you sit up and wonder if the reason for the correlation or how it works is as simple as people would have you believe. Please don’t misunderstand me, I have literally no answers. All I do know is that so many of the shipping assumptions, research and accompanying nonsense that we take for granted is no more real than Dolly Parton’s hair. And to think that people only want to talk about her music!

I TRULY HONESTLY CANNOT BELIEVE THIS ARTICLE. LET ME SAY THAT AGAIN. I TRULY HONESTLY CANNOT BELIEVE THIS ARTICLE. IT APPEARED IN TRADEWINDS ONLINE A COUPLE OF DAYS AGO. IN TERMS OF BANANAS, THIS IS RIGHT UP THERE WITH THE BEST EVER. PLEASE READ THIS SLOWLY AND TAKE IN ALL ITS GLORY. I HAVE ADDED NO OPINION OF MY OWN – JUST THE WORDS OF AN ANALYST FROM JP MORGAN.

THE SUMMARY IS THIS: DRY BULK IS KNACKERED (ALTHOUGH JP MORGAN DIDN’T ACTUALLY CORRECTLY EVEN GET CLOSE TO PREDICTING THE MAGNITUDE OF THIS DOWNFALL). IT REMAINS AS HAVING NO CONTROL ON DEMAND (WHICH OPTIMISTIC OUTLOOKS RELY ON CHINA REVERSING ITS CURRENT POLICIES AND HEADING BACK TO THOSE OF NEARLY A DECADE AGO); COAL, ONE OF THE MARKET’S MAIN DRIVERS IS SEEMINGLY ON A TERMINAL SLIDE IN DEMAND AS ALTERNATIVE ENERGY STARTS TO BITE (HEY MR COAL, ARE YOU NOT WATCHING HOW DUMB MR OIL LOOKS IN HIS HOPE OF EVERYTHING GOING BACK TO WHERE IT WAS BEFORE?); OH AND DON’T FORGET MR PARQUETTE’S SOMEWHAT CASUAL WARNING THAT DEMAND IS ACTUALLY SLOWING.

THE SECTOR IS CHRONICALLY OVER-SUPPLIED WITH SHIPS, WITH HUGE CAPACITY TO ADD MORE TONNAGE; AND SCRAPPING IS ACTUALLY SLOWING DOWN (WITH JP MORGAN ADMITTING THAT ITS OWN FORECAST WAS TOO HIGH); AND UTILISATION WILL ‘CREEP’ HIGHER IN 2018. YEP, YOU READ IT, 2018! CREEP HIGHER! OH, AND THE DOWNTURN APPARENTLY HASN’T LASTED LONG ENOUGH TO CUT OUT OVER-CAPACITY QUICKLY ENOUGH.

RETURNS HAVE BEEN ZERO AT BEST FOR A YEAR NOW. WHAT MORE DO YOU WANT? SO WHAT’S THE CONCLUSION? WELL OBVIOUSLY IT IS TO BUY MORE STOCK IN STAR BULK, A COMPANY THAT HAS DIFFICULT DEBT NEGOTIATIONS AHEAD, AND AN UNEXPLAINED ‘POTENTIAL EQUITY ISSUE’. NOW LET ME READ THAT BACK TO YOU SLOWLY. THIS GUY IS SAYING BUY STAR BULK. SLOWLY NOW . . . BUY . . . STAR . . . BULK.

HERE’S YOUR BANANA INDEX RATING MATE:

Bananas as far as the eye can see.

FROM TRADEWINDS 19TH JULY 2016:

JP Morgan has upgraded shares in Star Bulk while warning that the dry cargo market is taking the slow road to recovery. Analyst Noah Parquette shifted the Petros Pappas-backed company from neutral to overweight in a second quarter results preview.

While the analyst concedes the stock still carries risks relating to debt negotiations and a potential equity issue, he says potential upsides more than counter the headwinds. It came as JP Morgan told investors the bulk market is in an awkward position between the worst being over and the future looking bright.

“While the dark days of January/February are fading liking a bad dream, we still see serious risks to the story,” he said. “Namely: the over-reliance on China, the uncertain future of coal, and the large amount of dry bulk shipyard capacity in the world. We would have preferred if the hopelessness lasted longer, as that helped cleanse oversupply and was better in the long run, but somebody once said you can’t always get what you want.”

JP Morgan’s numbers show scrapping has slowed and will miss previous forecasts while demand was better than projected in the first half of 2016 but may now pull back.

“The market remains substantially oversupplied, and we think it will stay that way for all of 2016 and 2017, before utilization begins to creep higher in 2018,” he said. “We believe the recovery will be slow and gradual, given the extent of oversupply, and a recovery is still vulnerable to shifts in scrapping levels, new vessel orders and deterioration in demand.”

A picture paints a thousand words. So here is what I think the current business model for the three major shipping sectors look like. For the sake of comparison I have added some ‘control’ sectors as reference. Enjoy.

I am a saddo, of that there can be little doubt, so that explains why I came across a website selling old crap off of ships. It’s address is www.piecesofship.com and if you look carefully in the crockery section you will notice this piece of shipping nostalgia:

Don’t tell the creditors!

I might buy these and put them next to my collection of golf balls from Armada, Transfield, Adriatic Tankers and Pioneer Metals!

‘What do horses, kids and ships have in common?’ asked One Armed Archie as he gazed out over the Biffa bins strewn outside the Airdrie Working Men’s Club on a rainy summer’s afternoon. The wind whipped a ripped Lidl bag against the UPVC window and stuck it there while Archie sipped his treble vodka and Irn Bru wistfully. I had to admit that I didn’t really know.

‘Well, you spend ages thinking of great original names for them. Then after the bunting is taken down you end up having to pay for the thing forever more. Everybody else just gets to enjoy the parties, you get to enjoy walking round with the black bin bag at the end of it once they have all gone to bed,’ he opined. I did own a ship or two in my lifetime and I have had horses and children, and I can pretty much concur with Archie’s assessment of all three.

The finest working men’s club in the whole of Airdrie

I asked Stinky Derek what he thought. Stinky Derek is probably the richest man in Airdrie, having made his fortune by producing plastic toiled seats in a factory in Albania. ‘Well, I think you do get something back from your children in some sense. And if the horse is no good then at least you can eat it at the end. But a ship? Now that one I really don’t get. Why give it some stupid fancy name which gives you some weird emotional attachment to it? By bog seat factory doesn’t have some fancy name now does it? And I tell you this much, it makes money. Furthermore, when it stops making money I’ll get rid of it!’ he hurrumphed.

The Albanian Centre of Toilet Seat Innovation unveils the new technology to find the seat at night.

‘What’s so romantic about a giant warehouse with an engine on the back? I have a warehouse full of bog seats in Slough. We call it Unit 8, Slough Industrial Estate. If I stuck a massive engine on the back I doubt I would rename it ‘The Pride of The Seas’ now would I?’ he said, jabbing his finger in my general direction. ‘If you stopped naming them and having parties to celebrate them then you might start to actually work out what their true worth is.’

Stinky Derek butted in: ‘Having you heard the one about the dyslexic pimp? He bought a warehouse.’ (I’ll be honest here, he didn’t butt in at all, but I really just wanted to shoe horn in one of my favourite jokes. I’ve done it now, so rest easy, you won’t hear it again.)

There’s also some other odd facts about ship names. I sold a ship called something ‘Ambition’ to an oily sort of fellow. The ship promptly halved in value and he got fired. So much for ambition! Another one that I remember well was called something ‘Integrity’. The ‘owners’ of that particular gem transferred the ‘assets’ into a different company and declared themselves insolvent, thus avoiding $12m worth of creditors. Imagine what would have happened without any ‘Integrity’?

Warehouse

Derek swigged from his plastic bottle of cider and turned to me. ‘Did you ever got to a ship owner’s office?’ ‘Yep I did. Many times. And I’ll tell you one thing. I remember going to see a guy who was really struggling. You went in there and there was oak panelling everywhere. Old bits of ships, secretaries floating around. I went into his massive office, where he was sat all by himself looking miserable. He asked me if I wanted to buy a particular ship from him. He’d named it ‘Lucky Fortune’, but it should have been named ‘Costa Bundle’.

Race horse

He told me that it was bleeding him dry and he just wanted shot of it. I said that I wasn’t really interested, but let me have a think. As we left his office and walked back to the reception, right in the middle of the room was an enormous scale model of a ship. Painted on the side was the name ‘Lucky Fortune’. My friend turned to me and said ‘You know what? That model cost me more than the stupid thing earns now’ and promptly burst into tears.’

‘Well’, said Archie, ‘I don’t think I’ll be having a scale model of a toilet seat factory in my reception. You shipping people, you just don’t seem to own a calculator between you and think you own race horses not warehouses.’ Hard not to agree. And if you think dry bulk owners are in a pickle, just wait until you see what is about to happen to tanker owners. My advice is whatever you do, don’t name a ship after somebody you like. It will always end up getting set about by hundreds of men with blow torches. Not a fate any of us would wish upon our loved ones.

Firstly I would like to apologise to my reader, after a letter flooded in to complain about the lack of activity here at Mrprospector.co.uk. Other than my general indolence, which to be fair has been the primary factor in the empty spinning space of this blog, I have actually been away on jury duty. Had I known that I would be spending two weeks of 10am-4pm with a free lunch and only having to qualify for it by being eligible to vote and being sound of mind (which seemed rather optional when I met my fellow jurors) I would have been volunteering years ago.

Case one was possibly the most optimistic of fellows. He came into the courtroom looking like an egg on legs, as wide as he was tall. His crime was simple enough. He went to a restaurant, got down at the trough and ate for all he was worth, washed it down with a few craft lagers and decided to take his chances. He made a bolt for it and ran down Dundee High Street as fast as his little wooden pegs would carry him. Sadly for the defendant he was soon caught as he had ‘done a runner’ from a Kenyan restaurant and the staff would have probably caught him over 26 miles rather than the 100 yards he managed before he had to stop to catch his breath. Guilty, your honour!

Sir! Sir! You forgot to pay your bill!

The second case was a bit more complex. It basically revolved around somebody who paid everybody late. Literally everybody. Eventually the long list of people who he owed money to got a bit cross. They hired a large person with a slim grasp on the merits of right from wrong who beat this fella to a pulp. On trial was the large person and quite a few of his cohorts who paid for his bus fare to visit the poor payer, also throwing in some pennies for some sandpaper to get the dents out of his baseball bat.

And why am I telling you this? Well, bar the interesting bits (like the description of all the upgrades he’d done on his XR3i for example – smooth work indeed), there was enough time to think about the whole concept of payment. You see, shipping and commodity trading is all about debt. Everybody is basically in debt. The miner owes his staff and the bloke who owns the land. He borrows from an off-taker for a discount. The off-taker borrows from a bank to pay for it. He then borrows from an operator to ship it. He borrows from a bank to pay for the ship he’s borrowed from a ship owner. The buyer of the commodity then borrows from a bank to pay for the goods. He borrows more to produce the goods, while offering credit to the eventual buyer of the goods. In there as well are owners and operators who borrow from a bunker supplier, who borrow from an oil supplier, who borrow from a bank. Sometimes, and it seems rarely is the case, that somebody actually has all the money required to pay for what they are doing. Bearing in mind that banks borrow from other banks to lend to all the other borrowers it looks like an awful lot of this depends on debt.

In one sense it is hard to criticise. After all, if you look at the equity, cash flow statements and balance sheets of pretty much any business in this chain then only a few actually have assets. Of those assets they are by and large effectively owned by banks to the tune of 50, 60, 70% and higher. The common financials of most of these companies are built on humongous leverage. $250m in sales, $1m profits. Cash in hand? $1m. Short term debts of $15m, short term obligations $14.9m. These figures are as common as guest on the Jeremy Kyle show.

Look me in the eye and tell me you can’t pay me.

What gets me is this. All of this just about works. There are thousands of companies across the commodity and shipping spectrum that operate on this basis. Traders, marketing companies, operators, owners, bunker suppliers, and many many more. But, and here is a but the size of Kim Kardashian’s, what happens when somebody pays late?

Before we look at the consequences, let’s look at the motivation. The oft trotted line about companies wanting to hang onto cash for as long as possible to save money and look good with their banks deserves a bit of attention. Attention in the sense that it simply doesn’t scan. How much interest do you really save over a year by paying a bit late? Well, likely you lose as many contracts will have penalty clauses. Those that don’t basically invite people to pay ‘a bit late’, but likely the contract itself factors in this cost in the price. The second motivation is that people simply cannot pay. It can be because the company is going bust. Very real, quite possible. But then there are those that are habitual late-payers.

I have sat there when people who I worked with have said (when clearly just not bothering to pay as per terms for no specific reason other than they think it somehow saves money) ‘Well it is back to back’ as some kind of magic pacifier that sends a screaming child into instant equilibrium. Universally the answer that comes back from that statement is ‘I don’t give an owl’s pellet mate. Your name is in the contract’. It is a pointless platitude that, if it means you might end up paying somebody late, you are better off not doing the business in the first place.

The form of the late-payer is well established. It starts off with ‘back to back’ chat. Then the ‘man in charge’ is travelling. Then the banks are closed today in (insert here any jurisdiction that the banks are closed that particular day). Then they have the wrong BIC code. Then they are waiting for the swift. Then they are getting married that day. Then a funeral. Then it’s a public holiday. Then how about they pay you some of it for now, until things have settled down because the finance manager has left and nobody knows how to use the invoicing system. My favourite I have heard is that it is Halloween so everybody has left early. And so on.

I’m just too busy to pay you today.

In a commodity trading trail everybody is working, as discussed, on massively high debt-laden turnover. The first time a ‘Halloween’ event occurs it comes down to somebody somewhere deciding that their reputation shouldn’t be damaged. They pay their bills without receiving the payments they are owed and roll out the prayer mat that things will sort themselves out eventually. It is fair to say that entire businesses are built on the concept of stringing payments out until the creditor is in a position where any payment is better than none and discounts become the norm.

As it was once described to me by an avuncular gentleman in an ill-fitting pink polo shirt (who was in the process of banking a back-hander in the form of $100,000 of ‘hotel expenses’) that contracts are ‘merely a pause in negotiations’. The more I think about it, the more it seems like paying your bills on time is missing a trick. Spend time getting to know the cash flow situation of your counterparties with the intention to rack up a bill the size of a pelican’s, then get the script ready to fend off the calls until they will be forced to take any amount you deem fit to pay them to prevent the full disaster unfolding. Sell to princes, buy from paupers.

In certain parts of the commodity trading sector it has almost become suspicious when companies pay on time. Why? Well, because everybody pays late, but if somebody pays on time then they are trying to hide a different skim which is worth more to them than fudging suppliers out of cash.

I know of a company based in Jebel Ali which is solely the vehicle through which the management of a publicly-listed company take their skim. You do a trade with the publicly-listed entity and in fact they will have an ‘exclusive agent’. You sell to the agent at $20, the publicly-listed company buys at $21. So long as you are prepared to play the game you will gain contracts galore. And people wonder why they just cannot seem to crack into certain markets despite their low cost, high quality service.

The head office of a major commodity trader.

Now what of my jury service and the late-payer who eventually ended up more black and blue than a widowed bat. Well we argued about the guilt of the defendants. We all agreed that it was clear they had means, motive and opportunity. In addition there was DNA evidence, CCTV footage, text messages, and bank statements showing the bruiser had been paid. We returned a verdict of guilty of course. I am a pacifist (unless involved in a violent situation) so violence is not the answer (unless the question is ‘if you punch me in the face I’ll give you 20 quid?’). However, there is an idea that people who throw the stone in the pond by not paying on time should be made to suffer a bit. The notion that reputations can be broken by misdeeds such as the ones above are simply not true though.

We can all name blatant crooks that we have dealt with who ruin the ‘knife edge’ chain in which we operate by deliberately causing stress, passing on cost and creating bankruptcies almost as a business model. Are they guilty, but unpunished? Or are we all guilty of allowing it to happen?

I will leave you with a great story that I read today. There was a nationwide power cut across Kenya the other day. It took four hours of frantic work to get the national grid back up and running after the entire network began to trip one after another. The cause of this catastrophic event that embarrassed energy planners across the country? A monkey fell onto a generator, which unravelled the network. The pay-off is this – despite the entire black out that befell the country, the monkey was taken in by an animal sanctuary and release back into the wild totally unharmed. Ring any bells?

Every so often I read something that makes me wonder why oh why oh why anybody says it with a straight face. And why oh why oh why oh why anybody would print it for mass(ish) consumption. So I am going to start a taxation plan, which will charge a fee in bananas for those prone to spouting nonsense. One banana is a bit silly, the more bananas you have to pay for, the more dim your ideas are viewed. So . . . read this one, which I have helpfully annotated until you get the hang of it. At the bottom you will see the Banana Tax rating:

QUOTE The time is ripe for opportunistic buys in dry bulk, where risks taken now are likely be rewarded with respectable returns for “patient capital”. So believes Rahul Kapoor of Drewry Maritime Equity Research, who was speaking at the first Capital Link China Shipping Forum, held in Shanghai.

SO IF I HANG ON FOR LONG ENOUGH THEN ONE DAY I MIGHT MAKE A MODERATE RETURN? WOW! WHERE DO I SIGN UP FOR THIS?

In a survey of the main shipping markets and their outlook, Kapoor said Drewry sees energy shipping trades as remaining the more profitable ones to operate in, and sees little to justify investment in container tonnage, but in dry bulk it sees an opportune moment for secondhand buys because of dramatically depressed prices.

SOMEBODY ACTUALLY TOOK TIME TO PUT THIS INTO A PRESENTATION AND READ IT OUT? AND SOMEBODY TOOK TIME TO SIT THROUGH IT AND LISTEN? THEN SOMEBODY WROTE AN ARTICLE ABOUT IT? AND SOMEBODY EDITED IT? THEN SOMEBODY PRINTED IT? THEN I READ IT? THE MAN HOURS WASTED BY THE ABOVE STATEMENT SHOULD BE CHARGED AT THE HIGHEST TAXABLE RATE.

The Drewry secondhand dry bulk price index has slumped by 38.4% since January 2015.

THAT’S NOT EXACTLY THE ‘BUY’ SIGNAL ATTRIBUTED TO ANY MARKET IN THE WORLD.

Kapoor’s models predict a five-year panamax investment this year would produce an internal rate of return of 16% between now and 2020, and a similarly timed capesize play would bring 12%.

IT MUST BE TRUE BECAUSE HE HAS A MODEL. PITY THAT IT IS A CLAY MODEL OF A BIFFA BIN.

Kapoor believes recent “smart money” plays by John Fredriksen, Andreas Sohmen-Pao’s BW Group and Nikolas Martinos’s Thenamaris point in the same direction as Drewry’s numbers.

QUICK QUESTION: IF YOU READ THE PARAGRAPH ABOVE THIS, KAPOOR’S MODEL PREDICTS 12% RETURN FOR CAPES, BUT 16% RETURN FOR PANAMAXES. BUT ALL OF THE ‘SMART MONEY’ BOUGHT CAPES? I AM CONFUSED ABOUT THE ‘SMART’ PART OF THIS.

Buying the steel beats buying shares as a bet on dry-bulk recovery.

HE ASSUMES THAT THIS IS CORRECT, AND HE ALSO ASSUMES THAT YOU WILL ASSUME IT IS CORRECT, BUT TECHNICALLY HE IS ANSWERING A QUESTION THAT ISN’T BEING ASKED. AND IF IT WAS, THEN THE PERSON ASKING IT WOULD BE FINED SEVERAL BANANAS FOR BEING AN IDIOT.

“Investors who want to defensively play the dry bulk market can look to invest in physical assets as they would offer more certain and gradual return compared to stocks,” Kapoor told the Capital Link crowd. UNQUOTE

SORRY – THAT LAST PARAGRAPH DEFIES EVEN MY WITHERING WRATH FOR HOT AIR. NOT ONE SINGLE SHRED OF FACT IN THAT ONE. IN FACT QUITE A LONG AND PROVEN CASE FOR THE DIAMETRIC OPPOSITE BEING TRUE. I AM GOING TO GIVE MR KAPOOR A CRUMB OF SYMPATHY THAT THIS LOOKS A BIT QUOTED OUT OF CONTEXT. BUT THE JOURNALIST WHO WROTE IT SHOULD BE STRUNG UP BY HIS BANANA.

Me and the boys bombed heavily at a recent pub quiz when visiting our pal ‘Farters’ Parters – the flatulent monk from old Luton Town for a catch-up last week. Parters combines religious instruction at a monastery located just off the M1 by Watford Gap services with boozing and brawling in Luton town centre most evenings. It seems that forgiveness is abound at his local, ‘The Three Legged Doberman’ – located on the vacated site of an old C&A (ahhhh, now I miss my grey ‘Clockhouse’ ski jacket on a cold winter’s day!). One of the questions that we failed on was naming a song from an extract of the lyrics. We thought that it was from a Wham! tune, but it turned out to be from the National Anthem of Great Britain. Oh well.

When my head was beginning to clear on the back seat of the early morning Mega Bus back to Airdrie, I got to thinking about what sort of questions I might pose on freight that people should, and naturally assume that, they know the answer to. So here’s one that I came up with: Starting in 2012, what is the average premium for the Capesize market over the Panamax (based on average 4 T/Cs)? Come on, you all know this one right? To be fair I didn’t and I was quite shocked at the answer, which I will give you at the end of this piece. Now no cheating, no smart phones allowed. Just guess. It will surprise you a little bit I am sure.

I’ve been rattling on over the past few weeks about the use of relative values in freight trading. I won’t do the whole spiel for a 50th time, but I will show you this table again though.

Capesize

Panamax

Supramax

09/05/2016

320

456

562

22/04/2016

377

497

571

08/04/2016

313

461

554

22/04/2015

254

267

445

I showed it to you before, but in case that you have forgotten how it works, let me remind you quickly. This is an index of vessel values versus forward earnings (using the FFA curve). Due to some other stuff I am doing (which I promise to explain later) I have recalibrated the index figures for ease of comparison with some other stuff. The magic number is now 500 – whereby over 500 and it is better to buy the asset and sell the forward curve, under 500 and you are better off selling the asset and buying earnings (this is for a typical 5-year old vessel).

This index movement shows that while it is becoming more attractive to buy a Cape, ultimately the Supra remains by far the most attractive to own steel. Now it should not be assumed that means the Capesize sector is not interesting. This shows that it is more interesting to own the earnings, rather than the steel. If you want to go long, then Capes might be the place for you. Might be . . . but more evidence is required.

So let’s have a look at the relative values of earnings for the three ship types above. You will now see why I’ve recalibrated the index numbers above to 500 being the ‘tipping point’. Now the below graph shows you a couple of notable things once I’ve explained what you are looking at. I have calculated the standard deviation of the differential between Capesize, Panamax and Supramax average timecharter rates (as commonly published) and used an index scale of 0-1,000 to represent any given freight value against another, whereby 500 points on the index is the long-term average for that spread. Now please remember that this is not the standard deviation of the forward curves, it is based on the timecharter physical spot rate. So what you are able to do using my little ‘tool’ is to add any combination of the two and index it based on its standard deviation from its mean. With this in mind I applied it to the current FFA forward curves and it looks like this:

Apologies for the appalling quality of the image. If you want a better look at it, plus (and I really think I shouldn’t do this) I will also send you a copy of the spreadsheet so that you can play around with the data to see what it looks like at various rates and times. Note that all of the rates are below the magic 500 mean. It is telling you that the larger the ship the lower the comparable rates are. It is also telling you that the larger ships (specifically the Capes) are in the outer reaches of standard deviation as ratios. In short, it’s telling you that Cape earnings compared (in particular) to Supramax earnings are extremely undervalued going forward.

Today, yes you can say what you want about rates in absolutes. In fact today’s spot rates, when turned into the Relative Ratio Index is just 65 for C/P, 51 for C/S and 135 for P/S. A figure of 1 on the index is the furthest negative deviation from the mean that the rate pair has ever gone, and 1,000 is the highest. I’m certainly not in the ‘smartest in the room’ camp, but even I know that my chances of buying something at a tenth of its long-term average is a better deal than selling it, right? Oh, and there is time. Q4 looks good, but so do your odds out to 2019.

It might be time to get the dusty book out with all of your positions in it and just have a quick check that you are not the wrong side of this. Could you spot this from the FFA forward curves? Possibly, but see them below:

Well, it’s not the same. Can you see it perfectly? Not really (and that’s not just due to the shocking image quality!). It would imply that q4 on 2016 would be the worst place to do the spread. Using the RRI method we are trying here then it is a different story. In some senses that is a great relief because then at least all the work and effort means that we are showing something different and not visible to the naked eye.

It also dovetails neatly into what the vessel values versus earnings index is telling us, namely that shorting earnings of Capesizes and/or going long on a physical ship might actually be getting the base and the apex of your book the wrong way round.

This little back of the cigarette packet analysis does at least demonstrate that there is a lot more information to be had from looking at the prices of things in relative terms than just absolutes. In addition, one can test a current book, not just one with FFAs or ships or period tonnage, but it can be applied to bunkers, voyage, even marketing. In terms that even a dumbo like me can understand, once it has been compared, calculated and indexed then a trade at an index value of 500 is a coin flip, but otherwise you can start to establish what the chances are that a trade you are about to do will increase your probability of overall success. Or are you potentially adding more old tissues to an already blocked drain?

By the way, the answer to the question earlier is that the Capesize timecharter rates have averaged a 7% premium to Panamax, 32% premium to Supramax and Panamax a 26% premium to Supras. Is that what you expected? Probably you did as you are the smart kids, right?

So quite a few remarkable events have been occurring over here in the UK (although Airdrie has remained practically unmoved by the events I am about to outline for you). Her Majesty Queen Elizabeth II registered her 90th birthday the other day (gawd bless ‘er!). What an achievement that is too. Her tips for longevity? Long holidays, never carry money and have endless privilege and flunkies to do your bidding. Now there’s a shock! I do like the rule about only talking to her if she talks to you, surely the easiest way to win an argument.

As is usual on a Friday, me and the boys were sat round a wobbly table at the Airdrie Working Men’s Club, getting a couple of rounds of Heavy in during the world’s least aptly-named happy hour. Old Zeke was sipping away on his pint when he looked up at us and said ‘Do you know that on average the Queen gets sent two human turds a week in the mail?’ We all registered our disgust through murmurs and grunts. ‘I know, I know’ he said. ‘I’m just wonderin’ who it is that sends her the other one?’ he mused wistfully. Cue utter silence.

This is Airdrie? Right, you lot. Who keeps sending me these Richard III’s?

The second thing of note over here (but strictly speaking nobody here in Scotland gives a haggis’s hind legs of course) is that Leicester City, a 5000-1 shot won the Premier League football this week. Had you been over here at all then undoubtedly you would have been bombarded with chat about little Leicester City producing the impossible to win the biggest league prize of them all (at least that’s what the sponsors of this particular prize call it). Not since unheralded small town club Nottingham Forest won the same league back in 1978 has this been achieved.

Errr, hold up a minute! So basically, while it is a pretty rare occurrence for a team like Leicester to win the league, are you telling me that this sort of thing has happened before? Well, yes. Of course it has. Not just in England, not just in football, but in plenty of other events, trophies, tournaments and lots of other things besides. For example, would the Danish readers think it impossible for a totally unfancied team lift a major trophy? Or the Greek readers for that matter (who will of course remember the incumbent Leicester manager as the same man who took them to defeat against the mighty Faroe Islands in his previous job).

As much as I love to natter on about my adopted favourite sport, I will try to bring it to a freight-related point. The point is this: I was fortunate enough to be sent a presentation from a well known shipping company the other day. Firstly, I would like to comment that it was visually the single dullest thing I have ever seen. Secondly, while it has all the usual trapping of plausibility of a shipping presentation, it simply didn’t scan. In fact, it was the perfect shipping presentation all round then!

All good shipping presentations should have at least three of these graphics.

The opening slide was the ubiquitous graph of the average time charter rates from the Baltic. This is then split into some random and arbitrary periods according to whatever conclusion that the Powerpoint is lumbering towards. It’s usually four periods, sometimes three, never actually explained as to why they are chosen. Pick a place, draw a line, write some stuff.

However, what really caught my attention was this: a large red oval drawn around the market of 2008 and next to it, in large angry red letters (in default font of course) it read ‘THIS WILL NEVER HAPPEN AGAIN’. Now that is a bold, bold prediction. And it is statistically entirely incorrect. What is more, it actually only happened eight years ago. Not 30, not 50, not 100. Just eight years ago. It’s not like the market has taken a technical leap forwards. Structurally it is exactly the same as it was then.

It would seem that the power of analysis is better served by taking the greatest statistical show-stopper in the demonstrable history of the market and just say ‘forget it’. First question is why on earth any analyst at a company that owns ships is not dissecting those years, when everyone could make money in shipping, to try to find at least an electrical pulse to indicate what lessons could be taken away from them. No. Better just to say ‘I can’t explain it so let’s just say no more about it. Did I mention China yet? Here are some charts about China.’

It turns out that statistically the person who made up the quote about lightening is a bit of a plonker.

How does this loosely relate to the two things previously mentioned that happened in Britain over the past week or so? Let’s look at the Leicester miracle firstly. They nearly got relegated last season, which adds plenty to the story. However, in order to save themselves from relegation when they were considered about as irredeemable as a ticket to a Prince concert, they had to hit form that would have been worthy of champions to avoid relegation. They did it and avoided the drop. So one would think that the question would not have been whether Leicester could play like champions, as they had already proved they could, but whether they could sustain it over a season. They could. They could, just like Nottingham Forest did in 1978. Yep, just like it had been done before. Frankly to suggest that something that has actually already occurred cannot possibly happen again, particularly when nobody truly understands how it happened to the extent that they themselves could not recreate it, well that’s just plain wrong.

Secondly, take note freight forecasters of the world. Now that Leicester have won it gives carte blanche to all manner of ridiculous predictions and forecasts. Here are a couple, 2008 rates will be repeated at some point in the next 30 years. China’s economy will have a soft landing. Tanker rates will stay good for at least the next five years. Actually people are using two of those three already. How about there being a shipping company in the FTSE 100 before 2030? If anybody disagrees (as plainly in theory they could all be nonsense) then just remind them to ‘Look at Leicester’.

The final thing that struck me about the statistics is that of the Queen’s weekly mail. Now, we know that Zeke is one of them, could the other one be sat in your office as you read this? Statistically unlikely, but you cannot say for sure that they are not.